Shell’s $12 Billion LNG Experiment Becomes A Big Headache

The world’s biggest ship is on the way to becoming one of the oil industry’s biggest bloopers.

Prelude, a 600,000-ton monster which is five-times the size of the largest U.S. aircraft carrier, is designed to produce liquefied natural gas (LNG), and other petroleum liquids.

Installed atop a remote gasfield 300 miles off the north-west Australian coast, the 535-yard long Prelude is a bold experiment by the oil major, Royal Dutch Shell.

Unfortunately, the hugely expensive Floating LNG (FLNG) vessel, which is technically a barge because it cannot propel itself, is not performing as designed and hasn’t produced any LNG since early this year.

Safety Shutdown And Cost Blowout

Safety problems forced the closure of Prelude in January and a re-start date has not been set for the vessel which is estimated to have cost between $12-and-$17 billion — with the exact price never revealed by Shell.

The theory behind FLNG technology is that remote and relatively small offshore gasfields might never be developed using a conventional offshore platform and pipeline to an onshore processing plant.

So, rather than take the offshore gas to the onshore plant FLNG flips the business model by taking the plant to the gas with the bonus being that the FLNG vessel can be re-used once moved to new gasfields as old ones dry up.

It sounds good, except for the technical challenges of squeezing a big LNG facility into a relatively small space, and Prelude’s prospects might be brighter if prices for oil and gas had not plummeted since Shell started work on the project more than 10 years ago.

A series of recent events highlight the challenge Shell has ahead of it with Prelude, and plans for sister vessels which are supposed to follow.

Australian Safety Regulators Taking A Close Look

The immediate issue is for Prelude to satisfy Australia’s offshore oil and gas safety regulator, the National Offshore Petroleum Safety and Environmental Authority (Nopsema) that problems such as the failure of a back-up diesel power unit have been fixed and LNG production can restart.

But even if Prelude starts another challenge for Shell, and almost everyone else producing LNG, is that the price of the liquefied fuel has fallen sharply, in line with this year’s oil-price crash.

And then there’s the question of costs and while Shell has not revealed the capital cost of the vessel it has also never revealed the operational cost.

Goldman Sachs Puts Prelude High On Its Cost Estimates

Shell’s understandable secrecy with an experimental LNG system has not stopped outsiders from estimating Prelude’s costs, including an attempt last month by Goldman Sachs, an investment bank.

According to analysts at the bank Prelude is, when operational, the world’s most expensive new LNG project with a “commercial break even” cost of almost $20 per thousand cubic feet.

If correct that Goldman Sachs estimate means Prelude material costs more than double LNG from other new projects and four-times the cost of LNG produced in Qatar, the world’s LNG leader.

Despite Shell’s reluctance to discuss the cost of building and operating Prelude it is creeping back into the news, starting with comments earlier this month by an analyst with Credit Suisse, an investment bank, that no-one was rushing to restore production at high-cost LNG projects.

Saul Kavonic told The Australian Financial Review newspaper that record low prices for LNG made it a struggle “to simply cover operating costs.”

That was followed earlier today with news of an internal management shuffle at Shell, including the appointment of a new executive in charge of Prelude, and the first public comments in months from a senior executive about the floating LNG project.

Shell’s In No Hurry

Shell Australia’s chairman, Tony Nunan, was reported by The Australian newspaper to have said that it was still very early in the life of Prelude and Shell was not working to any specific timeline to resume production.

“”When we identify an issue or challenge we work through it methodically,” Nunan is quoted to have said. “We don’t just solve it for the short term, but we get it up an running for the long term.”

Nunan said Shell was pleased with the the progress being made at Prelude.